How to Handle a Contractual Dispute Before Going to Court

How to Handle a Contractual Dispute Before Going to Court: Negotiation, Mediation, and Arbitration

The first hours and days after a breach typically define whether you resolve in days or in years.

Your Counterparty Breached.

A client stops paying. A supplier doesn't deliver the service. A partner refuses to honor an agreement. At that moment, you have at least three options:

1. Act impulsively (terminate the contract without prior analysis, stop fulfilling your own obligations as retaliation).
2. Do nothing (wait for it to resolve itself).
3. Act strategically (document, evaluate legal options, protect your position).

Most companies without legal advice choose option 1 or 2, even without knowing it.

The first hours are the tipping point between a quick resolution and years-long litigation.

Step 1 — Understand Your Position

Before sending a letter or making a call, do this:

Review the Contract

What does it actually say? Not what you think it says. Review it line by line.

Look for:

• What specific obligation was breached (not "they didn't comply," but what is the exact obligation in the contract)
• What is your breach (because if you also breached, your position weakens)
• Is there a dispute resolution clause (mediation, arbitration)
• Is there a clause on form and deadlines for filing claims and remedying breaches
• Is there an anticipated assessment of indemnification for breaches (penalty clause)

Gather Evidence

Collect all evidence that the breach occurred.

• Evidence of the current breach (emails, WhatsApp, bank statements, photographs, etc.)
• Evidence of past breaches, if any. How they were handled.

This is to have a clear picture of your legal position and to properly analyze the alternatives to follow, understanding the risks and advantages of each.

Don't Act Emotionally

Don't threaten. Don't block their access. Don't stop providing services as retaliation (this makes you liable too). Don't post anything on social media.

How does Cubillos Lama help you as your Outside General Counsel? When we already know your contracts and your operation, we can help you understand your position in hours, not weeks. We review the contract with you, identify the key clauses, evaluate whether there are breaches on your part that need correcting, and guide you on what evidence to gather and how to properly preserve it. This first quick assessment is the foundation of the entire strategy. Additionally, as part of our OGC service, we support you in the ongoing administration of your contracts — we track deadlines, obligations, and compliance from both parties — so that breaches are detected and managed in time, before the situation escalates into a major conflict.

Step 2 — Analyze the Case with a Lawyer Before Acting

Once you've understood your position and gathered evidence, the next step — before negotiating, mediating, or suing — is to send a lawyer the facts and evidence for review. Not to "see what they think," but to build a concrete strategy together.

This means:

• Review the facts in detail: What happened, when, what evidence exists, and what's missing.
• Assess the strength of your legal position: Do you have a case? How strong is it? What risks are there?
• Analyze the real alternatives: Negotiate, mediate, or sue, based on concrete evidence.
• Define the objective: Do you want to recover money? Maintain the business relationship? Exit the contract? Send a signal? The strategy changes depending on what you're seeking.

This analysis must consider the full context of your business, not just the contract in question. For example:

• Is it a strategic supplier? If it's hard to replace or critical for your operation, the strategy should prioritize avoiding an immediate termination or preserving the relationship while protecting your rights.
• Is it easily replaceable? Then you can be firmer in demanding compliance or compensation.
• How does it impact your daily operations? A conflict with a logistics supplier during peak season isn't handled the same as one with an external consultant.
• What signal do you send to the market? If you yield easily, other suppliers or clients may read weakness. If you're too aggressive, you may damage future business relationships.
• Are there other linked contracts? Sometimes the breach of one contract affects other agreements with the same counterparty or with third parties.

How does an Outside General Counsel help you in this step? This is where the OGC model makes the biggest difference. An external lawyer who's just learning your case needs significant time to understand the context, your contracts, your business relationships, and your priorities. An OGC who already works with you has thorough knowledge of your company: they know who your critical suppliers are, how your business operates, what your expectations are, and how you make decisions. This allows analyzing each conflict with real context and presenting tailored solutions — not generic recommendations, but strategies that consider the concrete impact on your operation. At Cubillos Lama, as your Outside General Counsel, we can accompany you through the entire process: from the initial analysis to the definitive resolution of the conflict.

Step 3 — Formal Notification of Breach

Before initiating any resolution path, depending on the case it may be advisable — and in many contracts is mandatory — to send a formal written notification to the counterparty, communicating the detected breach and requiring them to correct or remedy it within a specified period.

This notification can take different forms depending on the severity and nature of the breach:

• Demand letter for compliance: Identifies the breached obligation, the evidence of the breach, and grants a specific period to remedy it. It's the most common format in business relationships.
• Cease and desist letter: Used when the breach consists of an active conduct that must be stopped immediately — for example, unauthorized use of confidential information, intellectual property infringement, or violation of non-compete clauses. It demands the immediate cessation of the conduct and warns about the legal consequences of failing to do so.

Why is this step important?

• It puts the counterparty in default: In many cases, debtor default requires a formal demand. Without it, they can argue they didn't know they were in breach.
• It fulfills contractual requirements: Many contracts require prior notification before exercising remedies such as early termination, penalty clause enforcement, or initiating legal action. If you skip this step, you may lose rights.
• It generates evidence of good faith: It demonstrates that you tried to resolve the problem before escalating. This strengthens your position in any subsequent path.
• It defines the starting point: The counterparty's response (or lack thereof) within the granted period gives you key information to decide next steps: whether there's willingness to resolve, whether it's better to negotiate, mediate, or go directly to contentious proceedings.

Practical recommendations:

• Draft the notification with legal advice. The content, tone, and method of delivery can have significant legal consequences.
• Send it through a medium that leaves proof of receipt (email with acknowledgment, notarized letter, or the mechanism established in the contract).
• Grant a reasonable period to remedy, appropriate to the nature of the breach.
• Don't include generic threats. Be precise about what you're asking and the consequences of non-compliance.

Depending on the counterparty's response or lack of response within the granted period, you'll be able to evaluate more clearly which of the following resolution paths is most appropriate for your case.

How does Cubillos Lama help you as your Outside General Counsel? We draft the formal notification for you — whether a demand letter or a cease and desist — with the appropriate tone, content, and legal basis for the case. By knowing your contract and the underlying business relationship, we can calibrate the firmness of the message: clear enough to protect your rights, but without unnecessarily closing doors if negotiation is still advisable.

The 3 Resolution Paths (From Least to Most Aggressive)

Once you have a clear case and strategy, there are three paths to resolve a contractual dispute. The order matters: each path implies greater cost, time, and wear, so it's best to exhaust the previous ones before escalating.

Path 1: Direct Negotiation

Direct negotiation is the first step and the most efficient. It consists of communicating with the counterparty to seek a solution without third-party intervention.

For it to work, you need:

• Clarity about what you're asking: This isn't an exploratory conversation. You must arrive with a defined position: what breach you're claiming, what you expect as a solution, and by when.
• Professional and unemotional tone: The objective is to resolve, not to confront. Communications must be clear, direct, and respectful. Avoid threats, reproaches, or language that escalates the conflict.
• Written record: All relevant communication must be documented. What isn't written doesn't exist. Emails, meeting minutes, formal messages — everything counts as evidence if the conflict escalates.
• A reasonable deadline to respond: Give the counterparty a concrete time to respond. This demonstrates good faith and, if they don't respond, strengthens your position for subsequent paths.
• Flexibility in the solution, firmness on the substance: You can negotiate deadlines, payment methods, or operational adjustments, but the breach must be acknowledged and remedied.

Direct negotiation is especially useful when the business relationship has long-term value, when the breach can be remedied, or when both parties have an interest in avoiding legal costs.

If the counterparty doesn't respond, shows no willingness to resolve, or positions are irreconcilable, it's time to initiate mediation or litigation.

How does Cubillos Lama help you as your Outside General Counsel? We prepare the negotiation strategy with you: we define your position, the non-negotiable points, acceptable concessions, and the best approach given the counterparty. If you prefer, we lead the negotiation directly on your behalf or accompany you in meetings to ensure that each communication protects your legal position and is properly documented.

Path 2: Mediation

Mediation is a structured process in which a neutral third party — the mediator — facilitates communication between the parties to help them reach an agreement. The mediator does not decide or impose solutions; their role is to create a productive dialogue space.

Characteristics:

• Voluntary: Both parties must agree to participate. If one refuses, it cannot be forced (unless the contract requires it as a mandatory preliminary step).
• Confidential: What is said in mediation normally cannot be used as evidence in a subsequent trial or arbitration. This allows the parties to speak more freely and explore creative solutions.
• Non-binding: The mediator doesn't issue a decision. If the parties reach an agreement, a binding document is signed. If there's no agreement, each party retains their rights intact.
• Fast and economical: Compared to arbitration or trial, mediation is resolved in a few sessions and at a fraction of the cost.

When it's advisable:

• When both parties have an interest in resolving but can't agree directly.
• When the business relationship has value and you want to preserve it.
• When the conflict has emotional or communication components that a third party can unlock.
• When the contract establishes mediation as a mandatory step before arbitration or trial.

When it's not advisable:

• When there's evident bad faith from the counterparty.
• When you need an urgent measure (like a court injunction).
• When the counterparty refuses to participate.

In Chile, the Santiago Chamber of Commerce (CAM Santiago) offers commercial mediation services. There are also independent mediators specializing in different areas.

If mediation doesn't produce an agreement, the next step is contentious proceedings.

How does Cubillos Lama help you as your Outside General Counsel? We advise you on whether mediation is appropriate for your case, select the most suitable mediation center or mediator, and represent you throughout the process. By knowing your business and your priorities, we can explore creative solutions at the mediation table that an external lawyer without context would hardly identify.

Path 3: Lawsuit (Arbitration or Ordinary Courts)

When negotiation and/or mediation don't resolve the conflict, the contentious path remains: filing a lawsuit for a third party with authority to resolve the dispute in a binding manner. This lawsuit can be filed in two different venues, depending on what the contract says, the circumstances of the case, or the parties' agreement.

Arbitration

Arbitration is a procedure in which an arbitrator (or panel of arbitrators) designated by the parties or by an institution resolves the controversy through an award, which has the force of a judgment.

• When it applies: If the contract includes an arbitration clause ("all disputes shall be resolved by an arbitrator..."), you are obligated to go to arbitration. You can also agree to arbitration with the counterparty even if the contract doesn't contemplate it.
• Types of arbitrator: In Chile, the arbitrator can be an arbitrator of law (rules according to the law), an arbitrator of equity (rules in fairness, according to their judgment), or a mixed arbitrator (free procedure, ruling according to law). The type of arbitrator is normally defined in the contract.
• Institutional or ad hoc: Arbitration can be administered by an institution like CAM Santiago (which provides rules, infrastructure, and a list of arbitrators) or can be ad hoc, where the parties directly designate the arbitrator and agree on the procedure.
• Advantages: Greater speed than ordinary courts, process confidentiality, ability to choose an arbitrator specialized in the subject matter of the dispute, and greater procedural flexibility.
• Disadvantages: Higher costs (arbitrator fees + institutional costs + attorney fees), limited remedies against the award (meaning fewer possibilities of review if the result is adverse), and dependence on the quality of the designated arbitrator.

Ordinary Courts